Morning Commentary: 68% and Dropping

Foreign Exchange - Morning Commentary

68% and Dropping

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
All the way back to October 1, 2018 market psychology was in a totally different place than where we are today. Back on October 1, U.S. economic performance was stellar and equity markets were taking in stride much of the negative news that is hammering U.S. and global equities today. On October 1, the probability of the Fed raising interest rates in December was 98%, with many forecasts calling for two or three more Fed rate increases in 2019.
This morning the probability of the Fed raising interest rates in December has dropped to 68% with many economists and forecasters backpedaling away from calls for more Fed rate increases next year. Markets are always looking forward and can turn on a dime. In a relatively short period of time, equity markets have shifted gears from optimism to pessimism as investors and traders cannot seem to squeeze through the exit doors fast enough.
What has changed to turn the markets upside down? Too many people that thought equities would be permanently ordained to rise are getting squeezed out…what appeared to be an equity correction like so many in the past is turning into a bear market in many sectors. But the most important reason lies with Fed and other central banks removing all the monetary stimulus, reducing their balance sheets, and normalizing interest rates that has been the fuel for much of the spectacular equity performance since the end of the Great Recession.
What all this means for the U.S. dollar is not clear at this time. The U.S. dollar remains a safe haven currency during these troubling times and the strength of the U.S. economy (relative to its peer group) and fallout from equities are disconnected at this time. While expectations haven fallen sharply regarding the Fed’s future rate path, U.S. interest rates have not fallen very far. We anticipate further volatile and choppy times ahead for the foreign exchange market and continue to advise importers and exporters to remain tactical and not strategic.
  • U.S. Housing starts for October came in at expectations at 1,228,000. The underlying data was disappointing as single family starts fell for the second straight month and permits, an indicator for future construction, fell 0.6%. Multifamily starts, apartment buildings and condominiums, rose by 10.3%.
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